Cryptography and Music: Integrating into Web 3.0

Author: Alexander Beasant

Translator: Evelyn｜W3.Hitchhiker

When you talk to any music artist, you will often hear a similar question: those who are "lucky" enough to get record deals often have up to 80% of their royalties taken by their record companies—this is before paying any remaining distributors or managers.

In fact, according to a report from Citi Group, artists generally only earn 12% of the revenue from their music. Considering the physical effort required to create music, intermediaries were once crucial, but the internet has begun to democratize this, allowing anyone with some simple software to produce music at a lower cost.

While this breakthrough is an example of how technology is disrupting the music industry, intermediaries still exist today. Take a look at the infographic below about revenue distribution. Note the allocation amounts to platforms, record companies, and other parties.

That is to say, everyone you know might be using Spotify, Apple Music, or some other music streaming service, so you might be shocked to learn how little revenue artists receive from these platforms.

Among Spotify's approximately 8 million artists, only 42,100 artists (0.53%) earn more than $10,000 a year; only 13,400 (0.17%) earn more than $50,000, which is only equivalent to the median wage of American workers in 2020. Simply put, only a small fraction of people—really just a tiny fraction of a tiny fraction—earn as much as the median American worker.

Don't tell those companies. On the artist's side, Spotify's latest Q3 2021 financial performance was attractive to shareholders. 381 million monthly active users generated $2.8 billion in revenue for the company, of which $112 million became free cash flow for corporate use. When it comes to the undervaluation of artistic work, it's no surprise that artists receive unfair compensation.

Mixing Music with Blockchain

Enter non-fungible tokens (NFTs) as a solution. Most people know they are images that exist on the internet for personal collections, or as profile pictures on social media, as Twitter just announced.

In practice, they can also represent new media, such as in-game resources for video games or tickets to real-world events. As Jesse Walden pointed out, ultimately, they are a way to make the internet ownable.

There is no doubt that our online world is filled with digital media, but how much real value do these files provide to their owners? The answer is almost zero.

What most users do not realize is that the ownership of their content has been transferred to Facebook, YouTube, or other social media sites, which profit in ways they deem appropriate. Users receive support from friends; meanwhile, these powerful tech platforms gain revenue and higher stock prices.

So, what happens when we turn some media into NFTs? One example is the Nyan Cat graphic, which recently sold for 300 ETH ($600,000) when its original creator turned it into an NFT.

Many who have not fallen into the NFT craze might fairly question why someone would pay over $500,000 for a cat meme. This hesitation is understandable, so let’s try to understand the potential of NFTs through a more music-related example.

Imagine you are a superfan of Taylor Swift when she is a rising star in Nashville. Let’s also assume that Taylor is a staunch advocate of this new technology and mints her first song as a 1/1 NFT.

And you happen to snag it. So how much would that NFT be worth now? Certainly several times more than when it was first issued. As a fan, you can "invest" in Taylor's career—and as Taylor starts winning Grammy Awards, your investment will yield dividends.

More importantly, NFTs also allow for perpetual royalties. This means that for all future sales of that NFT, Taylor will receive a percentage of the sale amount set by her (the artist). Do you see that? These music-backed tokens give her actual ownership of her work. There will be no more chaos of Scooter Braun selling her work, forcing her to re-record old songs.

At the end of the day, ownership is power. Currently, the situation for digital content creators is a mix of incomplete property rights for original artists and opaque payment flows, often leading to unfair value capture for creators.

NFTs achieve transparency, allowing creators to directly decide their terms from the start. Thus, minting music as NFTs allows artists to provide scarce, verifiable cryptographic proof of their work, forever linking artists to their songs.

Collecting Songs: A New Asset Class?

What changes if music is collected as NFTs? The answer lies in our relationship with music. Think about what explosive things a nostalgic song can do. Just as people collect art, cars, and stamps, why wouldn’t they immediately collect music? Few things can evoke touching and cherished memories in this artistic form.

NFTs provide tangible digital ownership of these memories, and the impact may still be premature. It not only offers creators new and interesting business models but also incentivizes fans to actively seek out new and emerging artists. NFTs and the broader creator economy mean we can all become supporters—and/or investors—in our peers.

To highlight an example, it’s worth delving a bit deeper into Royal to discuss how this platform and others like it are benefiting artists and musicians in practice.

Royal is a music platform that allows fans to earn royalties alongside their favorite artists. Artists retain the kind of ownership and independence that was previously controlled by intermediaries while setting the distribution percentage of their song royalties for their fans.

The fan ownership of these specific NFTs (which Royal calls tokens) allows artists not only to decide future revenue sources but also to determine exclusive benefits for fans, such as merchandise, special performances, or more.

With the support of venture capital and well-known figures in the music industry, such as a16z, Nas, and Disclosure, Royal CEO 3LAU gifted 333 limited edition tokens representing 50% streaming ownership in his latest single "Worst Case," validating this concept. Within two weeks, the song's value reached $6 million (with fans owning 50%), and trading volume on the secondary market for the tokens was $650,000.

The success of this concept validation shows a clear demand from fans to interact with artists, to the extent that on January 20, for the first time ever, people could own a part of Nas's music by purchasing music NFTs released on the platform. Demand outstripped supply, and the NFTs sold out immediately, catching the attention of Royal co-founder JD Ross.

However, if investing in emerging artists and achieving perpetual royalty payments is the financial aspect of this new paradigm, then it leaves another whole aspect yet to be addressed: the creative element.

Take Async as an example of creative explosiveness. Most platforms allow you to tokenize your entire work, while Async enables you to break your creation into subcomponents. These subcomponents are assigned to two levels: "Masters" and "Layers." Master is the complete art or music work, while Layer is the various components that make it up.

The function that blockchain achieves here is the ability to tokenize each layer separately. When artists create their art, they outline parameters on the blockchain, controlling how it will be rendered and allowing owners of each layer to change it.

Think of it as working with different layers in Adobe Photoshop. Together, they produce the final graphic. See the visual illustration below to understand this aspect.

As Async explains, artists "create a sandbox for the community to express themselves." Imagine a popular DJ releasing the master of their upcoming concert, with the underlying layer editable by fans.

These fans will be able to remix by emphasizing or reducing certain beats according to their preferences, and these actions could lead to a final product that exceeds expectations, to the point where the DJ decides to use it in their show in front of thousands—introducing a type of fan engagement and collaboration that was previously impossible.

Ultimately, NFT ownership unlocks another crucial tool in the Web 3.0 toolkit: incentive alignment through tokenization.

For example, Audius plans to disrupt dominant music streaming platforms by directly rewarding artists and their 6 million monthly independent users with its $AUDIO token. Rewards can be redeemed for cash and can be distributed for various activities, including uploading the top five popular playlists each week or driving traffic to Audius by building top monthly API applications.

Beyond streaming platforms, Web 3.0 record label DAOs are also emerging. Good Karma DAO is one such DAO, a community-owned record label authorized by the KARMA token. This token drives value-adding activities in a manner similar to the AUDIO token.

Community members earn $KARMA by signing artists, engaging in creative work, and contributing to the daily operations of the DAO. Its primary function is similar to traditional record labels, but its transparency and open governance challenge the status quo of existing enterprises today. Artists themselves are also allocated $KARMA upon signing, aligning their interests with the growth and success of the DAO.

The crypto music infrastructure of Web 3.0 is being built right before our eyes. The products supporting crypto music platforms—the market's camp—are evident. From the creation of NFT music files to streaming, record labels, and even on-chain production, everything is starting to fall into place. The next generation of music ownership and business models in the industry should be exciting for both artists and fans.